Can a manager lauch a successful hedge fund with less than $1 million in assets? Yes.
While having a large amount of AUM when starting out can be helpful, start up hedge fund managers do not necessarily need to start with a large asset base to have a large, successful hedge fund. Case in point – David Einhorn. David Einhorn started his hedge fund in 1996 with $900,000. His Greenlight Capital fund now has AUM of around $5 billion.
From David Einhorn’s story, we see that hedge fund managers can start a very successful hedge fund with less than $1 million in assets if they run a smart business by keeping costs down and focusing on fund performance.
Keep Costs Down
During the start up years Einhorn ran a very frugal operation. Initially he ran the fund out of a 130-square-foot office from Spear, Leeds & Kellogg (now part of Goldman Sachs) in a kind of rudimentary “hedge fund hotel” relationship. They had only the basics – a computer, a TC and a fax machine. During the start up period it is essential for managers to keep costs down and run a slim operation. This includes all expenses including legal expenses, administration expenses and rent.
Focus on Performance
While Greenlight started off with a very small asset base, they were able to attract more assets through continually great performance (approximately 37% returns in the first year and approximately 57.9% the second year). With returns like these Greenlight was finding that investors were coming to them asking to invest.
One of the barriers to raising a large amount of assets is the lack of a track record. Like many managers who have soft circled assets and decided to go into business for themselves, Einhorn and his partner thought they could start off with $10 million. However, Einhorn soon realized that without a track record he would not be able to raise the $10 million. He saw that he needed to start small and develop the track record so that in one, two and three years down the road, he would have the track record. Our advice to managers who are thinking of starting small to develop a track record is to start right away – you can’t have a one year track record by this time next year if you don’t start now.
If you would like to schedule a free consultation to discuss what you will need to do to start your hedge fund, please contact us. Other helpful resources include the following articles: